Sale of Property Which is an Ordinary Asset Subject to Credible Expanded Withholding Tax of 7.5%

May 22, 1996 BIR RULING NO. 061-96 50 (b) 000-00 061-96 Atty. Eduardo C. Feffer c/o Mr. Jose C. Laus 130 Loresto Street Morning Breeze Caloocan City S i r : This refers to your letters dated February 2 and February 27, 1996 stating a Deed of Absolute Sale was executed on January 30, 1996 by and between your clients, Mr. Jose C. Laus, et. al. and the New MBS Marketing Corporation over a parcel of land together with the improvements thereon (5-door apartments) classified as Commercial per Tax Declaration issued by the Caloocan City Assessor and situated in the Morning Breeze Subdivision, District of Balintawak, Caloocan City, Covered by Transfer Certificate of Title No. 297323, containing an area of 284.50 square meters, for and in consideration of P1,800,000.00; that the sellers are individuals persons who are not habitually engaged in the real estate business; that the sellers have been assessed a credible withholding tax 7.5% in accordance with Revenue Regulations no. 12-94; and that the sellers protested the said assessment of 7.5% but are willing and ready to pay the 5% capital gains tax. aisadc Based on the foregoing, you now request for a ruling on the correct tax rate. In reply, please be informed that pursuant to Section 21 (e) of the Tax code, as amended, capital gains presumed to have been realized from the sale, exchange or other disposition of real property located in the Philippines classified as capital assets , including pacto de retro sales and other forms of conditional sales, by individuals, including estates and trusts, shall be taxed at the rate of 5% based on the gross selling price or the fair market value prevailing at the time of sale, whichever is higher. On the other hand, Section 1 of Revenue Regulations No. 12-94 amending Section 1 of Revenue Regulations No. 6-85, otherwise known as the "Expanded Withholding Tax Regulations" reads "SEC. 1. Section 1 of Revenue Regulations No. 6-85, as amended, is hereby further amended to read as follows: Section 1. Income Payments Subject to Creditable Withholding Tax Rates Prescribed Thereon . Except as herein otherwise provided, there shall be withheld a creditable income tax at the rates herein specified for each class of payee from the following items of income payments to persons residing in the Philippines. xxx xxx xxx (j) Gross selling price or total amount of consideration or its equivalents paid to the seller/owner for the sale, exchange or transfer of xxx xxx xxx 4. Real property, other than capital asset, by an individual, estate, trust, fund or pension fund or real property, whether held as capital or ordinary asset, by a corporation not habitually engaged in the real estate business seven and one-half percent (7.5%) Furthermore, Section 33(a)(1) of the Tax Code, as amended, defines "capital assets" as property held by the taxpayer(whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subject to the allowance for depreciation provided in subsection (f) of Section 29; or real property used in the trade or business of the taxpayer. Such being the case, the aforementioned real property with a 5-door apartment constructed thereon classified as Commercial by the Caloocan City Assessor's Office does not fall within the contemplation of the foregoing definition of the term "capital assets". Accordingly, contrary to your opinion, the sale by your clients of their property which is an ordinary asset is subject to the credible expanded withholding tax of 7.5% prescribed under Revenue Regulations No. 12-94 amending Revenue Regulations No. 6-85 and implementing Section 50(b) of the Tax Code, as amended. prLL Finally, the aforesaid sale or conveyance of real property by your clients shall be subject to the documentary stamp tax imposed under Section 196 of the Tax Code, as amended. Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue